The relationship between a startup and a VC often becomes that of an overbearing parent and a fearful child. The parents push the child to a success she is not ready for, so they can have something to brag about to their friends. Their only contribution to the situation is the money they pump into the respective activity, and the child has to do all the hard work while hating it. Or the VC can turn into the kind of jealous spouse who will call you a dozen times a day to check where you are and will pop by your office just to make sure you’re there, working, and not fooling around with someone else behind her back.
Think I’m exaggerating? How would you describe a corporation preparing to send 40 people to supervise a team of 10 and claiming it’s just to make sure they will deliver what they promised and do it in due time? It all comes down to one thing, the lack of trust. What VCs conveniently tend to forget is that by the time they ask for their (mostly financial) help, startups have already achieved a few things on their own. That alone should prove their commitment and vouchsafe for the team.
Let’s not pretend that VCs fund startups out of the goodness of their heart either. They invest in companies with fast growth rates so they can have a quick ROI. A common tactic is to lower a startup’s valuation before it receives a first funding round, and then artificially grow it. To the outsider, it will seem that the respective VC has increased the money value by a whopping number of times with its expertise.
Sometimes VCs are aware of their privileged position in a negotiation and take full advantage of it, trying to impose terms that favor them and are unfair to the other party. They think taking control is everything, but their clutches are so suffocating they block any form of creativity and implicitly affect development up to the point of stopping it. That leads to underachievement and eventually to failure. Startup teams have their hands tied and watch the painful agony of their ideas.
“Being a successful entrepreneur requires being a jack of all trades. Many startups have founders with a passion for and expert knowledge in their particular innovative product or service but are inexperienced in and possibly intimidated by the financial aspects of starting, growing and profitably exiting a business.” – David Shelters
What entrepreneurs should do is seek expert advice, not just put their faith in the goodness of people. Because business is business, and its ultimate purpose is to make money. A mistake most startups make is enter a negotiation unprepared and unaware of the value of their idea or product. It’s no wonder their naivety results in harsh conditions they have to fulfill.
VCs take a hands-on approach to make sure their investment is protected and it grows, or so they claim. They do not trust the startup team can lead the business properly, but at the same time they have little or no experience in that industry. Startup people aren’t essentially business people, that’s true, but they have a better understanding of the product and its market. And it’s in their best interest to succeed, so they will do everything in their power to achieve that. They don’t need the overbearing parent breathing down their neck.
“Since they are operating guys themselves, they have very strong opinions on how it should be done. They tend to smother the management team, they can’t leave them alone, they are looking over their shoulder constantly.” – Katharine Campbell
The need for control can be attributed to the lack of trust I mentioned earlier, and to the fact that VCs don’t comprehend the modus operandi of startups. In their rush for gold, VCs stop caring if the business can sustain itself. They are very much engaged in the race of going to market and going global asap. But not all businesses have the potential of going global, and a quick go to market can lead to failure. At the end of the day, “go big or go home” can result in either going big, or going home.